Securing the Chain
Supply chains are more complex than ever – and the increased use of technology such as artificial intelligence and automation is altering the way they function. As supply chains adapt to new ways of working, the risks they face are coming into even sharper focus.
Supply chain risks are manifold and range from high-profile events, such as natural catastrophes, terrorism and cyber-attack, to the more mundane like power outages or employee sickness.
At a recent event we hosted in Dublin, risk managers discussed their supply chain risk issues and heard from experts about ways to mitigate some of those threats and challenges. Here are some key learnings:
Who is who?
Knowing who all the actors are in a supply chain can be a gargantuan task; and where there are second and third-tier suppliers this becomes particularly tricky.
Regular surveys are one way that risk managers can keep a handle on the various elements of the supply chain and the risks to it. In most cases, however, this is limited to in-house suppliers and in some cases, 1st-tier suppliers. So it is important to find other innovative means of evaluating the supply chain risks.
Modeling tools can help here. Models that show areas exposed to natural catastrophe events, such as earthquake and windstorm for example, are widely used by risk managers and their insurers to assess potential vulnerabilities in the supply chain. XL Catlin saw the potential here and developed a tool which helps conduct a detailed flood exposure evaluation for exposed sites.
Preparation is key
A major challenge faced by risk managers is trying to get their C-Suite colleagues to fully engage in preparing for supply chain disruption.
One risk manager delegate at our Dublin event, a former member of the military, pointed out that the armed forces are well used to preparing for events that might never happen. But those with a background in finance, say, are less acquainted with the idea of rehearsing for the unknown.
Practising for disruption is a key way to highlight potential weak spots in a supply chain.
A crisis management simulation can rehearse managing an incident in the first 24 to 48 hours, and show the importance of advance preparation and the need for effective communications both internally and externally, according to one of our expert speakers.
Depending on the industry and company in question, the crisis team might include a crisis management team head; head of legal/chief counsel; chief finance officer; head of human resources; chief of staff; head of production; head of brand; head of logistics; and head of communications.
Risk managers must work to encourage buy-in from their C-Suite and to demonstrate the value of rehearsing for an event.
Resilience and recovery
In the most resilient supply chains, there is board-level responsibility and leadership, and risk is considered in the decision-making process and planning is collaborative, one of our expert speakers told delegates.
If an event occurs, there are several assumptions that risk managers and their teams should make in order to enable a swift recovery, he added.
- Assume the problem is worse than it is and act quickly and decisively;
- Assume there are no secrets and the news will get out – be forthcoming and honest;
- Assume the company will be portrayed in the worst possible light and act accordingly;
- Assume you will have to make changes to people and processes. Be clear about the consumer message.; and
- Assume you will survive and get stronger – good behaviour pays dividends.
Have a Plan B
The widespread, devastating floods in Thailand in 2011 highlighted the importance of being ready for a supply chain event. Thailand is an important link in the supply chains of many global companies, notably many of those in the automotive and computer hard drive sectors. Analysts said that Thailand accounts for about 4%-8% of production capacity for any one company.
The floods, which followed the disruption caused by the colossal and tragic Tohoku earthquake and tsunami in Japan in March that year, caused severe economic disruption, and auto companies as far away as the United States were forced to curtail production.
This event highlighted the importance of having supply-chain back-up plans.
Some companies affected by the flooding demonstrated their resilience by putting into place plans to mitigate the supply chain risks – and resultant potential reputational damage.
When faced with a critical shortage in supply of certain goods or components, there are steps that companies can take to influence the reputational risks that might arise if they are unable to fulfil orders.This was demonstrated to good effect by some auto manufacturers who, rather than delay delivery of vehicles to customers because of a lack of a component, instead offered those customers an upgrade.
Offering customers an alternative – “upgraded” – product using a different component, for example, can help to allay reputational damage and keep customers happy. And while that may incur some short-term cost outlay, this likely will be outweighed by the longer-term benefit of retaining customers and reputation.
What’s the alternative?
The events of 2011 also highlighted the importance of having a network of alternate suppliers on which to fall back.
And it is important not only to know who your alternate suppliers are, but also what capacity they have. There is no point in having a back-up supplier if, when you have to call upon them, they are unable to deliver what you need when you need it.
If your alternate suppliers are also alternate suppliers to others, in an event such as a large-scale flood or earthquake that affects several companies in the same industry, over-reliance on that supplier could create bottlenecks.
So, to the extent that it is possible, knowing who your alternate suppliers will be in the event of a crisis is invaluable – as is having industry intelligence that can alert you if a problem hits your sector more widely.
The ability to monitor network disruption and industry-specific news is a powerful tool for risk managers.
Tracking shipments using new technologies can help companies to know the whereabouts of goods 24/7. And this technology also can be used to monitor incidents and give risk managers a broader view of their supply chain – in action, so to speak.
As companies of all sizes and across all industries continue to expand globally and adapt to new ways of working, the risk to supply chains is evolving. Risk managers and their brokers and insurers should work together to adapt to these changes to maximise resilience.
Martin Vinkenfluegel is International Property Risk Engineer at XL Catlin in Zurich, and can be contacted at Martin.Vinkenfluegel@xlcatlin.com.